Resources for Courses

New A Level

Economics

SAM

PLE

Resources for Courses

The Task• Use the information on various elasticities of condiments to prepare

and present a business strategy for use in your supermarket

• You have 45 minutes to prepare your strategy

• You then have 10 minutes to present your pitch and argue your case

Elasticities Apprentice

Income Elasticity of Demand estimates

Own brand ketchup -0.3

Heinz ketchup 0.2

Squeezy mustard -0.5

Unusual flavour chutney 1.4

Branston pickle 0.3

Redcurrant jelly 0.05

Price Elasticity of Demand estimates

Own brand ketchup -1.5

Heinz ketchup -0.3

Squeezy mustard -0.8

Unusual flavour chutney -1.1

Branston pickle -1.3

Redcurrant jelly -0.1

Cross Elasticity of Demand estimates

Own brand ketchup with value-brand bread rolls -1.1

Heinz ketchup with own brand ketchup 0.3

Squeezy mustard with Colman’s English mustard 0.1

Unusual flavour chutney with mature cheddar cheese -1.2

Branston pickle and chutney 0.8

Redcurrant jelly and fresh redcurrants 0.9SAM

PLE

New A Level

Economics Resources for Courses

SAM

PLE

Resources for Courses

Teacher Instructions• Split your class into small groups, probably 3s or 4s.

• Give each group the cards and ask them to identify the costs and benefits arising as a result of the new hospital development.

• Make a decision: should the hospital development go ahead or not?

Possible discussion points• Which costs are private costs/benefits, and which are external?

• Can we put a value on any of these externalities?

• Who is likely to benefit/suffer the most as a result of the hospital project?

• What were the reasons for their decision? Why were those reasons more significant than any other reason?

• What other factors might it depend on? What else might they want to know before making a final choice?

How else could you use this resource?

Externalities Mystery

SAM

PLE

The contract to build the new Townsville hospital is worth around £335m to us, which will be a significant source of revenue for the firm. We estimate that the project will cost us around £300m tocomplete, and should take two years. We will be hiring extra workers to undertake the construction ofthe hospital; we hope that most of these will come from the local area, as there is a good constructiontraining centre at Townsville college. We will be sourcing supplies from across the country, and hiringmachinery from a plant-hire firm based in a nearby city.

Mr Shaun KellyManaging director of Fabrillion Construction PLC

We will provide a wide range of services including general medical, surgical, maternity, rehabilitationcare and accident and emergency services. We have a total of 1,157 beds and will serve a population ofover 600,000 people in and around Townsville.The hospital will employ 7,000 staff, from doctors and nurses to housekeepers and porters, with an annual budget of around £334million for this financial year. We expect to see and treat 162,000 peopleas inpatients, outpatients, emergency patients and day-cases. This equates to around 638,000 visitsfrom patients during the year. The new hospital building will also incorporate the existing Townsville Medical School, which is run inpartnership with the local University.

Dr Nat PittsChief executive of Townsville Hospital Trust

The new hospital, eh? My daughter can’t stop moaning about it. Traffic this and dust pollution that,and she’s whinging about the look of the cranes on the sky line. Cranes?! I ask you. This environmentalistmentalist lark has gone too far. I bet she won’t be moaning about the hospital when she comes to havebabies, or when her babies have babies. And me? Don’t be silly, love. Of course I want the hospital. Ihave to travel on 3 buses at the moment to get to my appointments with the specialist. He says thathe’s never seen anything quite like my…. (interview terminated to avoid boring medical history of patient)

Mrs Julia RushtonLocal Townsville resident (interview in street)

SAM

PLE

Well, I’m hoping that Fabrillion employs some local lads when they take people on for the hospital contract. I’m self-employed but it’s very variable - some months I never stop and other months it’s asquiet as a bar during prohibition. Mind you, that Fabrillion has already done big work for the counciland never took on half the workers that they said they would. I’m not sure I trust them, but I’d stillwant to work for them if I got the chance.

Mr Carl BilsonPlumber

Rare natterjack toads have been found on the proposed site for the hospital, along with three raretypes of wildflower. In the UK this toad is one of only three amphibians protected under the nationalBiodiversity Action Plan. The reason for the threatened status of this organism is: (a) loss of habitatfrom human overpopulation, (b) reduction in habitable coast from construction of dykes and seawalls,and (c) acidification of aquatic habitat from acid rain and other pollution factors. It is essential that wefight to protect these rare and interesting amphibians, to preserve UK wildlife for future generations.

Mrs Val CosfordA member of Townsville Environment Group

The Townsville hospital is part of a new vision for the future that involves the construction of twentynew hospitals across England and Wales. This will give patients greater choice about where they aretreated and will help to cut waiting lists. Patient choice is one of our key policies, as it allows individualsto choose the medical facility that best suits them. Genuinely empowering people to exercise choice isessential to creating an even better, more responsive NHS.This new facility in Townsville will undoubtedly be popular, particularly as I have been informed thatthe existing healthcare provision in the town is underperforming according to government standards.

Rt Hon Polly Titian MPMinster for Health

SAM

PLE

I have worked at my surgery here in Townsville for over fifteen years and I’ve seen the town develop a lot in those years. New businesses have set up here and there are plenty of jobs available, but many of my patients have to wait a long time for hospital appointments and there are currently long waitinglists, so they’re forced to go on sick leave. I have no idea how the businesses cope with the number ofabsentees as a result. The nearest hospital is in the next town and I know that some of my elderly patients find it a challengeto get there for appointments. Having a new hospital in Townsville will certainly make life easier forthem. I’m hoping that the training hospital will have better facilities than the existing Medical School:there might even be some training sessions for GPs! I won’t hold my breath though…

Dr Stuart InglestonGP

I have put together some information about Townsville:

Miss Lexi BakerAdvisor at Townsville city council

Townsville UK Average

Total Population: 600,716

% aged 0-19: 26.3% 25.1%

% aged 20-34: 21.5% 20.4%

% aged 35-49: 20.0% 21.2%

% aged 50-64: 16.0% 17.4%

% aged 65+: 16.2% 15.9%

Average gross weekly pay £467.00 £450.83

Claimant count

Townsville UK Average

Claimant count 52 80

Travel time (in minutes) at 8.30am on a weekday

Current During After construction construction

From city centre to suburb 12 30 15From suburb to city centre 30 50 30

SAM

PLE

New A Level

Economics Resources for Courses

SAM

PLE

Resources for CoursesColour Chaos

Teacher InstructionsThis resource provides a sample essay on the policies that could be used to tacklethe market failures associated with obesity. There are several different colours of text used throughout the essay. The students’ task is to work out what the coloursrepresent (they represent where the student writing the essay has demonstratedskills in the areas of the four assessment objectives).

This activity is a good activity to do either as teachers introduce the policies topicsfor the first time, or as an excellent revision activity in the final weeks before the ASexams.

SAM

PLE

Discuss the effectiveness of policies that could be used to reducethe market failures associated with obesity

Quantity

Price/Cost

P

P*

q*

over consumption

q

Demerit good S

DD

(actual)

^

^ Quantity

Price/Cost

P

P*

q*

over production

q

Negativeexternalities

MSC

MPC

MSB

^

^

Market failure exists when a market fails to allocate resources in the most efficient way.In the case of obesity, we need to consider both demerit goods and negative externalities.People may not realise the full effects on themselves of eating junk food and not gettingenough exercise (i.e. junk food is a demerit good). These consequences may include ashorter life, reduced ability to enjoy activities such as playing with one’s children, reducedworkplace productivity resulting in lower income and so on. Additionally, obesity mayhave a negative impact on third parties, resulting in social costs of obesity being greaterthan private costs (i.e. obesity is associated with negative externalities). For example,being uncomfortable due to reduced space from sitting next to an obese person on publictransport or at the cinema, or the extra strain placed on limited NHS resources as a result of obesity meaning that fewer resources are available to treat other illnesses/ diseases. For both demerit goods and goods that have negative externalities, the quantitytraded is too high, and thus there is market failure. The following diagrams illustratethis:

Policies that could be used include indirect taxation (a tax on production), regulation(using rules and regulations to limit production or consumption), subsidies and information provision. Indirect tax works by raising the costs of production for firms,thus reducing supply. In the case of obesity, the tax could be placed on junk foods anddrinks, and perhaps also sedentary leisure activities such as computer games/consoles,TV subscriptions etc. In theory, the tax should be set equal to the value of the externalcost, so that the private cost of eating junk food or playing computer games is increaseduntil all externalities are internalised, and the private cost equals the social cost. This is illustrated in the diagram below, where MSC is now equal to MPC + tax.

SAM

PLE

Quantity

Price/Cost

P

P*

q* q

MSC / MPC + Tax

MPC

MSB

Tax^

^

Quantity

Price/Cost

P

Psub

P*

q* q

MSC

MSC + Subsidy

MPBMSB

In theory, indirect taxes would be an economist’s preferred solution to market failure as it uses the price mechanism to allocate resources. In practice, however, there are anumber of problems with this so-called “fat tax”. Firstly, it is impossible in practice toknow what the ‘correct’ level of tax should be since we cannot accurately measure theexternal costs (e.g. we do not know exactly how many fewer years an obese personmight live, or exactly how less productive they might be). This means that the tax couldbe set too low, in which case the externalities will be reduced but not removed, or itcould be set too high. A “fat tax” is likely to also be highly regressive, since it is likely toaffect low income groups more than high income groups. This regressive effect could beexacerbated if it is shown that it tends to be lower-income groups of people that consumethis unhealthy food. Another practical problem arises when we try to think about whatexactly should be taxed. For example, should salads at McDonald’s be taxed, or full-fatmilk in supermarkets (which is essential for small children), or bags of nuts which arehigh in fat but an essential source of protein for vegetarians? Should we tax Wii-Fit, orjust Call of Duty? These are important issues. However, should such a tax be imposed,then it would at least generate tax revenue for the government. This revenue could behypothecated, and the revenue used to support healthy eating schemes or exercise/cooking classes. So, not only would some of the negative externalities be reduced, butdemand for healthier alternatives might rise.

So how might these subsidies for healthy food and exercise classes work? Subsidieswork by reducing a firm’s costs of production, therefore increasing supply (shiftingMSC down by the amount of the subsidy), and consequently reducing the market price.The diagram below shows what would happen in theory if a subsidy for healthy activitiesor food was used to promote a healthier lifestyle to reduce obesity. The market price ofhealthy food / exercise classes would fall from p to psubs and the equilibrium quantityconsumed would rise to the socially optimal quantity of q*.

SAM

PLE

As with taxes, economists tend to like this solution as it works through the price mechanism and theoretically results in the socially optimal quantity being achieved,thus removing the market failure of underconsumption. However, also in common withthe use of indirect taxation is that fact that in reality it is impossible to get the value ofthe subsidy exactly correct so that the socially optimal quantity is reached. If the valueof subsidy provided is too great, then too much will be produced/consumed, and thiswould be an inefficient use of resources. Subsidies also incur an opportunity cost, sincethe government money used to provide the subsidies could be used for providing a different government service, such as primary education or expansion of public transport.In this example, however, because the money used to subsidise the healthy options wouldcome from hypothecated tax revenue, it could be argued that the opportunity cost isminimal. A perhaps more problematic issue is that government subsidies may not actuallybe used by healthy food companies or leisure centres to actually lower their productioncosts, and therefore lower their prices. The subsidies could alternatively be used tospruce up the changing rooms, or improve the quality of the equipment, rather than increase supply. Because the market price wouldn’t fall, there wouldn’t be an increase in the quantity demanded of leisure services, for example. This again would be an inefficient use of scarce resources.

An alternative policy that would ideally be used in conjunction with the tax and subsidyapproaches, is the use of information provision, perhaps mandated through regulation.For example, the government could legislate and insist on improved labelling of food sothat consumers can see easily which foods are healthy and which are not (e.g. the trafficlight system, or ‘wheel of health’ used by some supermarkets). This information wouldneed to be done in conjunction with improved education, so that consumers know thatthey can eat unhealthy food sometimes, but need to focus on healthy food. However, it is difficult to label foods that aren’t pre-packaged, such as meat from a butchers or freshfruit from a greengrocers or bread from a local bakery. It could be argued that labellingmight cause government failure, if it increases the amount of packaging being used,since this uses up more resources and could cause more littering (and in turn, morenegative externalities). It would also increase business costs, which might impact onsmall businesses more than large ones, and this is anti-competitive as well as inflationary.Therefore, any regulation in terms of information provision would have to be carefullythought through.

In conclusion, it is clear that a number of policies would need to be used together inorder to reduce the market failures associated with rising obesity in the UK. It is unlikelythat the problem can be completely removed, however, since it is difficult to change attitudes of consumers.SA

MPL

E

New A Level

Economics Resources for Courses

SAM

PLE

Resources for CoursesMacro Policy Conflicts

There is a consumption led consumer boom in the UK, largely due to the positive wealth effect of houseprice inflation and availability of credit. There is rising CPI inflation and the deficit on the UK’s current account of the balance of payments is growing.1

Teacher InstructionsThese scenarios can be used in a variety of ways.

• They could be the basis of group discussions that result in a mini-presentation to the rest of the class

• They could be an class or homework assignment completed by individuals

• They could be used as a basis for a competition as to which individual (group) manages to best solve the problems

• Allow plenty of time for discussion – it can get quite heated!

• There are no perfect solutions – the idea is to find the best solution (or least bad!)

In each scenario laid out below, decide which government macroeconomic policy(ies) is(are) appropriate and comment on your reasons.

SAM

PLE

There is persistent inflation at 4%, however unemployment is rising and both producer and consumerconfidence is low. The interest rate is set at 0.5% and the government deficit is around 8% of GDP.2

Oil prices are set to rise as OPEC has announced a tightening of oil quotas for its members.There is adownturn in the UK manufacturing sector, with significant structural unemployment in the Midlands andthe North.3

Full employment exists, and there is a government budget surplus. But public services are failing and the government manifesto pledged to increase spending on health, education and transport in real terms.Inflationary pressure is threatening to overshoot the government’s inflation target. 4

SAM

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The Sterling exchange rate is rising, but domestically there is falling aggregate demand and rising structural unemployment. International competitiveness is falling, causing a downturn in the manufacturing sector.5

Large firms have plenty of cash reserves but both producer and consumer confidence is low. Small firmsare finding it difficult to access credit, and so are consumers. The budget deficit is large and Sterling isstrengthening against trading partners’ currencies.6

Welfare dependency is rising however poverty is on the increase. Pensioners are living longer and requiremore health care spending. The government has recently lost its AAA rating and must make significantinterest payments on both the existing and new borrowing.7

SAM

PLE